Ethical economy: In favour of the living wage

In the United States and some other developed economies, wages for the least well paid are too low. A mandatory living wage is the best way to redress this injustice.

The idea of minimum wages is well accepted, but the American $7.25 an hour does not meet the simple standard of providing enough to support the worker who earns it. For an adult in New York State, self-support requires 55 percent more, $11.25 an hour in a full-time job, according to The MIT Living Wage Calculator. And a just minimum should really be enough to raise a family - something closer to the $23.58 an hour required to support a single wage-earner with one child.

The minimum wage is one part of the remarkably complex pay system found in all developed industrial societies. Economists often suggest that wages are determined by market forces, the supply and demand for labour, and by employers’ calculations of the value of labour. But actual wages influence both the market and the perceived value of labour. It is more accurate to include market forces and economic value somewhere in the middle of the long list of factors which contribute to the ever-shifting social agreement on pay levels. This agreement is established in the mysterious way that all social orders are built - the powerful push, the weak resist, traditions are followed and evolve, justice is respected and flouted, market forces and economic calculations nudge.

By far the most important factor in determining pay is the social judgment of value. The main reason that bankers, advertising executives and doctors are paid more than teachers, childcare workers and street cleaners is that society values the former more than the latter. And the main reason that the minimum-wage jobs pay too little to support a family is that society has agreed that is what such labour is worth. This is an injustice, because honest labour should always be rewarded with enough to live a decent life.

To be fair, the social judgment of these occupations is less harsh than the pay level suggests. The very poorly paid usually receive welfare benefits from the government, either in cash or in the form of free or cut-price services. It is an awkward arrangement, but unavoidable in societies which have decided that pay should be determined by the job but spending power should be determined, at least in part, by needs and family situation. That division will exist as long as family breadwinners do not receive special pay status.

Still, the combination of low pay with additional benefits subtracts from the dignity of work. The worker deserves his or her reward, and the right reward is a living wage. Besides, in the current arrangement the low paid often find that playing the benefits system pays better than hard work, to the detriment of both demoralised workers and overburdened taxpayers. It would be better to rely more on pay and less on transfers.

That should be possible. After all, the United States and other developed countries produce enough goods and services and have enough infrastructure for every man, woman and child to enjoy not merely life’s necessities but a generous share of its comforts and luxuries as well. With sufficient wisdom, the pay system could be arranged to share out that abundance fairly without much help from the benefit system.

The beginning of this social wisdom is higher pay at the bottom of the social scale. Of course, a sudden massive increase in the minimum wage would be counterproductive. Too many employers would be unable or unwilling to pay, so jobs would be lost or moved into the unregulated black market. However, history supports the case for steady and ultimately substantial increases in the minimum wage. When the less well off have more, they spend more, adding to economic activity and reducing the need to extract taxes from the better off. Besides, better remunerated workers have more motivation to work while their employers have more motivation to increase the productivity of this more expensive labour.

The macroeconomic objections to higher minimum wages deserve serious attention, but they often hide higher earners’ justified fear of losing out. After all, when those at the bottom end up with more - as they inevitably would with a higher minimum wage, even after benefit cuts - those at the top must end up with less. Doctors would still have much higher incomes than cleaners, but both the doctors’ own pay and the ratio of their pay to cleaners’ remuneration would fall.

The desire to maintain consumption and social status is legitimate, but must be set against a higher virtue - solidarity. The fruits of economic success should be shared equitably. A living wage for all is a good standard of success.